Nova Scotia guarantees Yarmouth ferry payments to U.S. Navy

The Nova Scotia government has guaranteed Bay Ferries Ltd. will make its charter payments to the United States Navy for the new Yarmouth ferry.

On March 24, the McNeil cabinet approved a $5 million US ($6.58 million Cdn) letter of credit to the United States Navy for the charter of the military catamaran that will be rented by Bay Ferries.

The backstop was not part of the government announcement on the same day that it would be providing $32 million in financial assistance over the next two years to restart the ferry service.

Transportation Department spokesperson Brian Taylor said the letter of credit is a standard type of security. It was part of the agreement with the U.S. and provided security in case of a default.

"We chose this type of security because it doesn't require an upfront cash outlay," Taylor said in an email to CBC News.

"We pay around $20,000 interest and administration to the bank per year and that was included in the total costs released last week."

Too much risk, says critic

Diane Surette, theexecutive director of finance with the Department of Transportation andInfrastructure Renewal, saidif Bay Ferries goes out of business, that would trigger a default.And the United StatesNavy would have its losses covered.

"[Bay Ferries]is an experienced operator," she says Wednesday.

"They've got two other ferry services that they run in Nova Scotia.The possibility of them defaulting is extremely, highly unlikely."

The ferry was built in 2007 and is owned by the United States Navy'sMilitary Sealift Command. It's been chartered by Bay Ferries for two operating seasons, with options for two more.

Tim Houston, the finance critic for the Progressive Conservatives,says it's too much risk for taxpayers.

"The U.S. Navy got the taxpayers of Nova Scotia to pay for a retrofit of their vessel got any fees they're going to earn under the lease guaranteed by the taxpayers of Nova Scotia," he said.

Cabinet order

The cabinet order reads, in part:

"Approve the Minister of Transportation and Infrastructure Renewal on behalf of Her Majesty the Queen in Right of the Province of Nova Scotia entering into a Standby Letter of Credit Agreement with the Royal Bank of Canada respecting a letter of credit in the amount of five million dollars, United States currency, ($5,000,000 USD) to be issued by the Bank for the benefit of the United States Department of Navy, Military Sealift Command ("Navy") to secure Navy against a default by Bay Ferries Limited under the charter party for the vessel HST2 (the "Charter Party")."

The new ferry will be renamed The CAT and will travel on a daily schedule between Yarmouth and Portland, Maine.

Bay Ferries will take possession of the ferry on or just before April 1. The vessel will then head to a shipyard in South Carolina to be prepared for service.

According to a government statement, ferry service is scheduled to begin on June 15 and run until Sept. 30.